Planned CT Bank Merger Stirs Search For Uneasy Investors

Four out-of-state law firms have announced that they are investigating potential claims against the board of directors of Southern Connecticut Bancorp Inc. in connection with the company’s recently announced merger.

As typically happens when such deals emerge, the firms said they are looking into concerns about possible breaches of fiduciary duty and the price to be paid to Southern Connecticut Bancorp (SCBI) shareholders.

SCBI agreed late last month to a merger with a Naugatuck residential lender in a stock deal valued at $19.5 million.

Under the deal Naugatuck Valley Financial Corp., operator of Naugatuck Valley Savings & Loan, would absorb SCBI, parent of The Bank of Southern Connecticut. The deal is expected to close in the third quarter, once regulators, shareholders and depositors approve.

Naugatuck Valley Financial, founded in 1922, has $542.3 million in assets and 10 banking offices in the Naugatuck Valley.

SCBI launched in 2000 as a lender to small- to medium-sized businesses. It has $137.9 million in assets and four offices in the New Haven area.

Naugatuck Valley Mutual would convert from an institution partly owned by its depositors to a stock-owned institution, selling to the public a 60 percent stake.

Naugatuck Valley Savings and Loan will also become the wholly-owned subsidiary of a new stock holding company, Newco. SCBI Bancorp shareholders can choose between cash, shares of Newco common stock, or a combination.

The firms that have announced investigations into the deal include New York-based Stull, Stull & Brody; Brodsky & Smith in Pennsylvania; Howard G. Smith, also in Pennsylvania, and Levi & Korsinsky in New York.

Stull, Stull & Brody, for example, said it is looking into concerns about the “price to be paid to SCBI shareholders and the process by which the Board is addressing the transaction.” No further details were provided, and requests for comment from the HBJ were not returned by any of the firms.

Stull said the investigation could result in class-action litigation.

SCBI President and Chief Operating Officer John Howland did not return a call seeking comment. Legal experts say such investigations are not uncommon.

“Almost any time there is a merger between public companies, lawyers investigate, and in many instances bring a lawsuit about the adequacy of the compensation provided to shareholders,” said Wystan Ackerman, a lawyer with Robinson & Cole, who is not involved with the merger. 

Ackerman said law firms tend to bring these types of lawsuits with the hope of obtaining attorney’s fees, or receiving an award if the courts prohibit the deal from going forward, or force it to be modified.

However, “almost all of these cases are dismissed and attempts to get a court to [prohibit] the merger is denied,” Ackerman said. In fact, Ackerman said he is “not aware of any instance,” where a Connecticut court prohibited a merger of a public company.

William Bouton, a lawyer at Hinckley, Allen & Snyder in Hartford, said when law firms announce these investigations they are typically in an “information gathering stage,” and are “trying to gage the level of discontent among shareholders.”

“It is very customary for these types of firms to take a look at mergers and see if there is a possibility for business for them,” Bouton said.

Bouton said sometimes these firms do get an indication that there is shareholder discontent, which may be why four separate firms are looking into the SCBI deal.

“I don’t believe that these firms announce investigations without some basis for it,” Bouton said. “It may be very minimal, but there must be something about this deal that tweaked their interest. They may see a little smoke, but now they want to check if there is a fire.”

Bouton said there are several ways officers and directors of publicly-traded companies can break their fiduciary duty in a merger. If a board member, for example, receives a financial benefit in a deal that is not disclosed to shareholders that can be considered a break of that trust.

Additionally, if the bank didn’t conduct a reasonable valuation process, that could also create legitimate shareholder concerns.

Greg Bordonaro is a Hartford Business Journal staff writer. His ‘Financial Sense’ column will appear every other week.